There will be clear winners and losers if U.S. President Donald Trump continues with plans to reform trade and financial regulations this year, according to a panel of portfolio managers from Foyston Gordon and Payne Inc. who spoke at a client event in Toronto yesterday.
Trump’s intention to adjust border taxes for countries exporting products to the United States will inevitably affect companies reliant on trade, said Stephen Mitchell, senior vice-president and portfolio manager of global equities. Obvious beneficiaries will include American manufacturers that export products to other countries, he noted, using the example of a company in his team’s portfolio that exports automobile mirrors.
“All of their manufacturing is done in Michigan, and two-thirds of their production is exported . . . so they would be an obvious winner,” said Mitchell. “But what we don’t know is whether there’s going to be a countervailing on tariffs from other countries. A reduction of tax for [the company] might be offset by the possibility of limited export opportunities, so that would have to be something we weigh through.”
Trade barriers will affect exporters from Mexico and China but will also create opportunities for value investors seeking companies at a discount, noted Mohammed Ahmad, vice-president and portfolio manager of emerging markets equities.
Ahmad noted his team’s portfolio was underweight on investments in Mexico and China before the U.S. election because Mexican valuations were too high and he questioned the quality of certain Chinese companies. But those markets are becoming more volatile because of Trump’s protectionist stance.
As a result, certain investments are “now within reach,” said Ahmad, noting the emerging markets equities’ team has added a Mexican subsidiary that has experienced lower valuations since the election to its portfolio.
As well, investors should keep an eye on China, which has a lot to lose when it comes to trade, according to Ahmad. “It’s a big part of trade. Any deficit the U.S. has and any policy change with trade in China will have a bigger impact in the economy. It’s not our belief that there’s going to be wholesale trade restrictions with China initiated by the Trump administration, but the challenge is the U.S. can start off with specific trade measures and China can retaliate.”
Compared to countries that are heavily reliant on exports, countries with a bigger domestic focus, such as Brazil, face less of a threat from Trump’s trade policies, noted Ahmad.
In addition, some businesses, such as U.S. banks, are profiting from Trump’s desire to lessen financial regulations, said Mitchell. “The most important thing those banks need to have is rising interest rates. Banks are not making money on mortgages right now because of the capital costs they have and low spreads. Our perspective is this will improve. Relaxed regulations help . . . and most [banks] are up 20 per cent since the election.”
Another Trump effect is the sudden spike in interest rates, said Robert Head, senior vice-president and portfolio manager of fixed income at Foyston Gordon and Payne. But while markets have reacted positively since the end of 2016, Head noted there’s still much uncertainty around how inflationary pressures will affect fixed-income investments in the long term.
There’s much to “sort through what Trump is saying to see what’s feasible,” said Head. “How will he finance tax reform and infrastructure and what would that entail? How would more borrowing from his administration affect interest rates?”